Market Sentiment & Lateral Thoughts

from Neil Behrmann and other authors

Bitcoin breaches US$2,000, outperforming gold by wide margin

The price has soared by almost 400 per cent in the past twelve months.

London:- BITCOIN has broken through the US$2,000 barrier as growing numbers of individuals and speculators are buying the virtual, digital currency as a safe haven.
So much so, that Bitcoin, priced at US$2,234 on Monday, May 22, has outperformed gold by a wide margin and now exceeds the bullion price by a whopping 60 per cent. A key reason is the shortage of bitcoins, compared to large supplies and stocks of gold.
Satoshi Nakamoto, the creator of the virtual, digital “cryptocurrency” in 2009, devised “Blockchain”, a technical network that limited the issuance to a maximum of 21 million bitcoins. So far, only 16.4 million are currently in circulation, according to specialist dealers. Bitcoin’s small market capitalisation of US$32.8 billion thus compares with central bank gold holdings of 1.1 billion ounces worth US$1.35 trillion and estimated official and private gold stocks of 5.6 billion ounces worth around US$7 trillion.

Reasons for the surge

While gold supplies leak on to the market when prices rise, Bitcoin in contrast, is an illiquid, exceedingly volatile market. The price has soared by 377 per cent in the past twelve months, but daily fluctuations have invariably been 5 per cent or more, dealers report.
A major reason for the recent price surge, is the growing market concern that investigations into US President Donald Trump’s links with Russia and a potential lame duck administration, could be bearish for equities. There are also hopes that the Security Exchange Commission will allow the formation of a Bitcoin Exchange Traded Fund (ETF) that will boost demand and large numbers of Japanese investors have been selling yen and buying bitcoins. Demand in China for Bitcoin and other cryptocurrencies has soared in the past year, according to traders. Some individuals and corporations have used them to avoid exchange controls and transfer money to counterparties in Asia, Australia and New Zealand. Finally, Bitcoin is being used for transactions in nations such as Russia, Venezuela and Nigeria.

Hayek’s private currencies and how Bitcoin works

The fear of outside, novice investors is that the market is complex and supplies could suddenly increase and knock the price. Participants in the market are unconcerned and regard Bitcoins and other cryptocurrencies as the natural development from the ideas of economist Friederich Hayek who recommended private currencies more than 40 years ago. Mr Hayek was concerned that central banks were printing money irresponsibly and the consequences would be inflation, financial booms, busts and recessions such as 2007 to 2009. To achieve a sound virtual private currency, Bitcoin’s inventor Satoshi Nakamoto (a pseudonym) devised an open-source, peer-to-peer technological network, “Blockchain”.
The Bitcoin Foundation says that Blockchain is a public ledger for all past and present Bitcoin transactions. By tracing the history of each single coin in the network since its creation to the latest owner, any participant can tell who owns Bitcoins, and how many.
Inherent in the technology is cryptography which uses sophisticated mathematical equations (algorithms) and secret keys to encrypt and decrypt data. A bitcoin wallet is an application that stores, sends and receives bitcoins. Individuals or companies can “mine” Bitcoins if they understand the complex technology.
A Texan “miner” told The Business Times that he can only mine tiny fractions of Bitcoins over lengthy periods and this illustrates the tight control of new supplies. Bitcoin can be sent anywhere, anytime, (almost) for free, and with little regard for national borders or government/bank-imposed restrictions, states the Foundation. Increasing numbers of vendors are accepting Bitcoin as payment.

Other virtual, digital cryptocurrencies

There are several hundred cryptocurrencies. The total market capitalisation, including Bitcoin, is worth only US$68 billion and the other main ones are Ripple and Ethereum. The Blockchains of different cryptocurrencies usually vary: they may have different rules, transaction times, security algorithms and so on, states the Foundation. But the basic rule is that nobody, in particular, is in charge of a cryptocurrency which is only manifested in records of transactions on a public digital ledger.

Technical factors causing price surge

There are also several technical reasons why Bitcoin and several other cryptocurrencies have soared, maintains Stephen Macaskill, CEO of the Digital Asset Exchange in Auckland New Zealand. Participants in Bitcoin market have been seeking “scaling” solutions to increase the liquidity of the Bitcoin market. Recently a scaling solution, “SegWit” was implemented on Litecoin, another cryptocurrency. SegWit is a possible stepping stone to scaling bitcoin, Mr Macaskill says.
Entrepreneurs are also beginning to raise hundreds of millions in cryptocurrencies for new projects via Initial Coin Offerings (ICOs). The only way you can invest in them is if you own bitcoin and other cryptocurrencies.

IMF positive and negative about growing market

An International Monetary Fund (IMF) paper states that “virtual currencies offer many potential benefits, including greater speed and efficiency in making payments and transfers – particularly across borders. It finds that blockchains are “an innovative decentralised means of keeping track of transactions in a large network”. But the IMF also states that “virtual currencies pose considerable risks as potential vehicles for money laundering, terrorist financing, tax evasion and fraud. Risks to financial stability may eventually emerge as the new technologies become more widely used.”
Regulation of the market of some 700 cryptocurrencies, is expected to tighten. Crime agencies are concerned that cyber criminals, who hacked and crashed Microsoft programmes, demanded ransoms in bitcoins.

© copyright Neil Behrmann in The Business Times, Singapore

Neil Behrmann is author of Trader Jack- The Story of Jack Miner and anti-war children’s novel Butterfly Battle- The Story of the Great Insect War
Signed copies and background can be obtained directly from http://www.thestoryofjackminer.com/?page_id=14 and Butterfly Battle at http://www.readmore-books.com/
Reviews are on both sites and Amazon. The updated, 2015 Waterloo commemoration version of Butterfly Battle is on Kindle and e-books.
We welcome readers’ reviews on Amazon. A sequel to Trader Jack will be published in coming months.

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